VIX dropped by 23%, expect another 20% drop in the next day or two and we are back to pre-crash levels (16 to 18) with renewed irrational exuberance, this time with less participation, as the smart money begins to distribute to the to the retail crowd.

The major difference between the market environment during the recent record highs in the equity markets and now is the rising bond yield and real threat of higher inflation which will not disappear during the next few weeks or months or in 2018.

The Great Bull Trap of 2018 is a work in progress and this time the markets will not stop at S&P 2540.

“The odds of a bad outcome have gone up,” he said, explaining that the economy was already growing nicely before the $1.5 trillion in tax cuts, $300 billion of additional spending, and now, the proposed a $200 billion infrastructure package.

“Don’t forget, all of these deficits have to be paid for,” and all this stimulus could be “too much of a good thing,” he said.

Blankfein knows all too well what can happen under such conditions.

“If the economy starts to overheat, and the Fed feels that it’s behind” it will need to act, Blankfein said, pointing to the period leading to the dot-com bubble.

“I remember 1994,” he said. “That’s possible, too. That would be quite jarring to the economy.” At that time, the Federal Reserve tried to keep inflation in check with a hefty does of rate hikes that took Wall Street by surprise.

Despite his concerns, Blankfein’s “base case” remains that the economy will remain on track, though he’s urging caution moving forward for retail investors.

“I’d be planning for the contingency that this turns out to be a worse time than people are thinking,” Blankfein told Romans. “With the Fed raising rates, with the withdrawal of QE, with the budget deficit widening out, I wouldn’t say this is the time I would max out on my risk.”

The recent turbulence on Wall Street, which pushed the U.S. stock market into its first correction in about two years, seems to have soured fund managers on where the economy may be headed.

According to the BofA Merrill Lynch fund manager survey for February, 70% of those polled believe the global economy is in its “late cycle,” the highest such reading since January 2008, right as the financial crisis began to gather steam.

The late part of an economic cycle typically coincides with the market’s peak and precedes a decline into recession. According to the Wells Fargo Investment Institute, which in early January suggested the U.S. economy was poised between the mid and the late parts of the business cycle, this stage is marked by moderating growth, tightening credit, a peak in confidence, higher inflation and an acceleration in the rate of interest rates rising.

Some of these factors appear in the current cycle. Investor optimism recently hit a seven-year high, before dropping to a three-month low in its latest reading. And a recent report showed wages growing at their fastest pace in more than eight years. That raised concerns about whether inflation could be returning to markets after years of dormancy and those fears sparked worries that the Federal Reserve could become more aggressive in raising rates. In the decline, both the Dow Jones Industrial Average DJIA, +1.03% and the S&P 500 SPX, +1.34% fell into correction territory, defined as a 10% drop from a peak. Both have subsequently recovered some of that ground.

The changing views on inflation and rates have been widely credited with sparking the recent volatility on Wall Street and the survey showed that 45% of respondents said that an “inflation-induced bond crash” was the biggest risk facing markets, followed by a policy mistake by either the Fed or the European Central Bank.

The equity correction was also marked by an exodus from stocks. According to the BofA survey, equity allocation fell to net 43% in February from 55% overweight in January, the largest one-month decline in two years, according to the investment bank. Meanwhile, the percentage of investors who have put on protection against “a sharp fall in equity markets” saw its biggest one-month jump on record.

Separately, allocation to bonds was at a record low of 69% underweight, while the average cash balance of the fund managers surveyed rose to 4.7% from a five-year low of 4.4%.

“While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip,” Michael Hartnett, BofA Merrill Lynch’s chief investment strategist, said in a press release.

In the 80's the US had virtually no debt. Now the entire world has $280 trillion worth of debt.

Sure buddy. Exploding rates mean nothing.

Nearly everyone in the market is super bullish, so it must be even easier than being bearish. There is no wall of worry. Only fake projections of a tiny bit of anxiety. Margin debt highest in history. Account Cash levels lowest in history. yep, thats just so 'bearish.'